Can someone explain how national debt effects the lives of normal people? It seems like almost every developed western nation runs massive billion dollar deficits every year, and that seems to be totally fine. Nothing bad ever seems to happen. Occasionally you hear old school conservatives saying we need to balance the budget, but why should we if every country is in debt with seemingly no negative effects?
In: Economics
Politicians love to equate Government finance to personal finance scaring people into believe that any kind of debt is bad and that the government has out of control spending, when in reality operating the Government has far more in common with corporate finance that personal. Corporations and Governments operate in debt all the time and it’s perfectly normal and healthy. The catch is making sure that debt is sustainable.
In the case of Governments money should be borrowed during times of economic recession. It may seems counter intuitive but government spending and borrowing helps drive the economy which in turns gets you out of the recession. Government cut backs and austerity actually make the economy worse.
But that debt has to be paid back. If it’s allowed to grow out of control eventually it could cause an economic collapse, but that is doom and gloom scenario.
Politically speaking more often than not austerity and lowering government spending has more to do with lowering taxes than actually reducing the deficit. While increasing the debt (politically speaking) is about not having to raise taxes and making the politicians unpopular.
The average person isn’t really affected by government debt in the same way as increased taxes, which is why the government borrows so much.
For the average person government debt doesn’t affect your directly, only indirectly.
If you have a retirement plan or a pension there is a very good chance that much of that money is invested in Government bonds, which is loaning the government money. This is generally considered a very safe investment because the government is highly unlikely to default on the debt and pays decent interest rates. Worldwide retirement and pension funds actually rely very heavily on government debt to work.
Another factor is that debt keeps your taxes low. One of the main reasons to borrow money is to pay for government programs, infrastructure, and wars without raising taxes.
A percentage of your tax dollars is used to pay back debt though, so it’s give and take.
If you have debt you need to pay interest. So next year your budget is smaller because you have to allocate money to interest payments. If you borrow more money to pay of an old loan that’s bad and unsustainable.
HOWEVER, if you borrow money on year one and use that money to grow the economy, next year your total budget is larger then the increase expense of interest payments. This is good and healthy you are useing the borrowed money to benefit everyone. Now if the deficit grows faster then the economy then you are spending it unwisely.
Nothing bad ever seems to happen because debt isn’t, in and of itself, a bad thing.
Debt lets you spend money soon and derive the economic benefits from it sooner. You can try to save up money for decades to buy a house, paying rent all the while, or you can take on debt right now, buy a house now, and in the long run what you save on rent outweighs what you pay in interest.
A national economy works the same way. You borrow money to build a bridge *now*, and that bridge provides and economic benefit *now* that hopefully outweighs the interest. Debt is time traveling for money. “Normal people” benefit from bridges and roads and schools sooner than they otherwise would have.
Of course, that only applies if debt is used wisely. When it is used unwisely, the growth of your economy slows, your currency devalues, and you have to pay more interest to borrow money. To the normal person, this means imports, particularly energy imports, become more expensive. Also, the slowing economy means fewer jobs and less demand for labor, resulting in more unemployment and lower wages.
In essence, it doesn’t affect anyone’s lives. The national debt is not debt in the same sense as household debt is, at least when the debt is denominated in a currency that the government has control over. That is because the government can print as much money as it wants to if it felt like repaying it all at some point. Finance works differently when you’re the one issuing money.
However, the national debt is frequently used by politicians to scare people away from policies that prioritize public investment. “How are we going to pay for all this?” is what they often say when someone suggests expanding the welfare state or investing in infrastructure, but when it comes to things like the military they spend like crazy. This attitude is called “fiscal soundness” amongst other things and it’s generally a big fat lie that politicians like to say to win political arguments.
Depends on how the debt is generated. If it is borrowed, large portions of the tax base go to payments and interest. If the fed “prints money” (the term isn’t literal), it makes money less valuable.
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